The main danger of Riba, Interest

The below article was submitted as an assignment at Knowledge International University for the subject Islamic Finance highlighting the main danger of Riba (Interest) as viewed by the student. The article is slightly revised to fit a blog post.

Islam, unlike other faith systems, is not only a religion but a complete code of life. It governs individuals, families, institutions, and even governments. As every society is made up of individuals with needs, Islam also governs their economic activities to ensure fair opportunities for every individual to sustain or grow themselves economically.

One of the main methods of achieving such an economic state is the prohibition of Riba, also known as interest. Allah states in the Quran

“That is because they say: “Trading is only like Riba (usury),” whereas Allah has permitted trading and forbidden Riba (usury).”

Islamic financial system believes in wealth generation based on trade & sharing of profits and loss. It does not believe in generating wealth by accumulating interest by mere passage of time. Imagine a situation where an individual takes an interest based loan of AED 100,000 for a period of one year. He is asked to return this amount with an additional amount of AED 3,000 for every month of the year. This means that the payable amount after a year will be AED 136,000. Notice the debt growing as soon as the amount is borrowed while wealth generation on the invested money is yet to start. This is because time is required for business setup, business generation and closing of sales to allow profits to flow in to the company account. While initial profits may only cover running costs, the interest rate of AED 3,000/month is allowing the debt to grow while rate of genuine growth of wealth is dependent on sale of services or goods. In case after 1 year, the borrower has not made enough profits, his debt keeps increasing by passing of every month. This economic exploitation is visible at every level of the economic cycle of society. People & countries end up in debt for unrealistic amounts while genuine trade activities may never be able to generate such amounts to pay them off.

Ex-President of Nigeria, Olusegun Obasanjo, mentioned at the G8 Summit 2000, “All that we borrowed up to 1985 or 1986 was around $5 billion and we have paid about $16 billion yet we are still being told that we owe about $28 billion. That $28 billion came about because of the injustice in the foreign creditors’ interest rates. If you ask me what is the worst thing in the world, I will say it is compound interest.”